2.0 The Assignment. 2.1 Introduction

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Curtis Chambers
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1 Terms of Reference for Hiring of Audit firm for internal Audit of PAF secretariat and Financial monitoring of POs and COs PAF II-AF2-S-QCBS Background The Poverty Alleviation Fund (PAF) is implementing a demand led community based poverty alleviation programmes funded by the International Development Association (the IDA), International Fund for Agriculture Development (IFAD) and Government of Nepal (GON). This organization aims to enable the poor, women and the vulnerable groups to gain access to resources for their productive self employment, to encourage them to undertake income generating activities for poverty alleviation and improved quality of life. The objectives of the PAF are to: a) improve the income of the poor and vulnerable groups; b) empower the poor especially women and vulnerable groups; c) increase the access of poor communities to infrastructure for improving their livelihoods; d) strengthen institutional capacities of the PAF, its partner organizations (PO) and communities organizations (CO) to undertake and sustain poverty alleviation efforts; e) mobilize and coordinate internal and external resources to finance poverty alleviation programs; f) develop a system of poverty monitoring and evaluation; and g) advise the government on effective policy/program for poverty alleviation. From the FY 2061/62, PAF initiated programme implementation in six districts, namely Darchula, Mugu, Pyuthan, Kapilbastu, Ramechap, and Shiraha. Based on the experience gained in these six districts, from the FY 2062/63 PAF has expanded programme in additional nineteen districts, namely Accham, Baitadi, Bajhang, Bajura, Dadeldhura, Dailekh, Dolpa, Doti, Humla, Jajarkot, Jumla, Kalikot, Mahottari, Rasuwa, Rautahat, Rolpa, Rukum, Sarlahi and Sindhuli to implement its poverty alleviation programs. From FY 2070/71 PAF has expanded its area by selecting another additional 15 districts as program districts namely Gulmi, Arghakhachi, Lamjung, Myagdi, Nawakparasi, Nuwakot, Bhojpur, Morang, Banke, Surkhet, Dang, Dolakha, Sunsari, Kailali, Gorakha. Apart from above, PAF widened its program area by adding another 15 districts in FY 2071/072. By this, PAF now covers the 55 districts in total throughout the country. The PAF needs to hire services from registered Chartered Accountant Firm to serve as the Internal Auditor for the PAF Office for the FY 2072/073 and onward. The following are the TOR for carrying out internal audit of the accounts of the PAF Office. 2.0 The Assignment 2.1 Introduction The PAF income comprises of the IDA grant assistance, Grant for capacity building and the GON grant assistance made from three sources: 1 GON source and 2. IDA grants source and 3. IFAD. The expenditures are mainly made for (1) Financial assistance to POs and COs, (2) Payments for

2 technical advisory services, (3) Payments for consultants and (4) Operational cost of the PAF and purchases of equipment and materials for the PAF. The PAF maintains records and accounts, in Government cash basis of accounting system, to reflect the operations, resources, and all expenditures in respect of the project. Such records and accounts of the PAF is required to be internally audited on a trimester basis before submitting it for its statutory audit by the Office of the Auditor General. The PAF is also required to send the IDA, FMR no letter than within 45 days of every trimester, no later than three months after the close of the fiscal year (i.e., by October 15th), a copy of its un-audited financial statements, and no later than six months after the close of the fiscal year (i.e., by January 15th), a copy of its audited financial statements and the audit reports. 2.2 Objectives The main objectives of the assignment are to: Assist the PAF management to review the internal control and accounting system. Assist the PAF management to asses whether the accounting system and procedures adopted by the PAF are maintained as per the generally acceptable accounting principles and Government cash basis of accounting system. Evaluate the performance of the PAF in terms of its financial operations, budget and related financial management. Assess the efficiency and effectiveness of the PAF s procurement functions. Evaluate the performance of all Partner Organization in terms of its financial expenditures and at ten community Organizations of each POs of all districts to assess whether the accounting system and procedures adopted by the POs/COs are maintained as per the generally acceptable accounting principles and maintained as per agreement with PAF. Based on observation of the audit, suggest PAF management with recommendations to establish more transparent and effective financial management system. 3.0 Scope of Services The Audit Firm shall examine books of accounts maintained by PAF and carry out internal audit of the books of accounts of the PAF for the 2072/073 as per schedule. In addition to this, the Audit Firm shall also look into details the store accounts including goods receipt notes, requisition forms, purchase orders, procurement analysis, stock and Assets ledger. The Audit Firm is required to go through the Operations Manuals, Financial Management Manuals and Rules of the PAF, and other legal documents including the Bank guidelines on procurement, which form the basis of financial operations of the PAF. 4.0 Specific Tasks to be performed by the Audit Firm The Audit Firm is required to provide the following services under this assignment.

3 4.1 Review the existing book keeping system and examine transaction of PAF and suggest standard internal control and accounting system suitable for PAF. 4.2 Prepare all necessary adjustment entries (closing entries) relating to the fixed assets and depreciation, inventories, sundry debtors, sundry creditors, outstanding expenses, advances and prepaid expenses, security deposits, fund balance, capital reserve, deferred expenditures/income etc. as per the generally accepted accounting practices; prepare the unaudited financial statements of the PAF Board, and the Project Accounts 4.3 Review and verify all the necessary documents and vouchers to ascertain that the accounting records have been done as per the generally accepted accounting practices. 4.3 Verify that the funds received from the International Development Association and GON/N has been used in accordance with the covenants of the IDA Development Grant Agreement with due attention to economy and efficiency, and only for the purpose for which the financing was provided. 4.4 Verify that goods and services financed by the PAF have been procured in accordance with the Procurement Guidelines of the World Bank, Public Procurement Act 2043 and Public Procurement Rules 2064 and the Rules and Manuals of the PAF. (This implies in particular that the Audit Firm is required to review the efficiency and effectiveness of the PAF procurement functions to procure consultants as well as POs services including the PAF compliance with scheme and POs eligibility criteria.) 4.5 Verify that necessary supporting documents, records and accounts have been kept and they are consistent with the Rules and Manuals of the PAF and IDA Financing Agreement. Also, verify financial related documents including audit report of COs and POs 4.6 Verify that the accounts have been maintained properly and give true and fair view of financial situation of the PAF and of the resources and expenditure. 4.7 Evaluate the internal control system and effectiveness of present accounting system and suggest other alternatives, if any, building on computer software and computerized accounting system and assets verification 4.8 Cary out physical verifications of Infra sub project and Guideline followed or not in Income generation sub project of Community Organizations. 4.9 Report to the PAF Board on the entire financial management of the PAF including discrepancies, irregularities and illegal operations that are of material effect once a year Conduct financial monitoring and reporting with recommendation of 90 POs of PAF Programme districts ) and 180 sample COs see annex 1 for detail of POs and COs

4 Qualification and work experience Qualification and experience of the firm: (i) Minimum 5 years of documented experience of auditing of foreign aid based project and community based /community managed project or governmental/ngo/ingos audits. (ii) Must have an experience of at least 5 projects in last 5 years of worth 20 lakhs each. (iii) Having documented evidence of average financial turnover of 40 lakh annually for last three years. (iv) Other relevant documents like company registration, VAT registration, latest tax clearance, etc. are necessary. Professional Staff and key Person Involvement The Audit Firm shall assign a team of auditors qualified and experienced for the execution of the assignment to ensure that the assignment is completed within the allocated time. The team shall comprise of one senior auditor with more than 7 years experience and required number of assistants acceptable to the PAF as per given below : Minimum Input required for the assignment will be as follows: S. No. Staffs unit trimester No. Month For POs 1. Audit Manager (FCA) person Auditors (CA) Person S. No. Staffs unit trimester No. Number 1. Team leader (CA) person Auditors Person Reporting Requirement and Performance Requirement The Audit Firm is required to submit a comprehensive audit report of the PAF accounts in i) as per trimester basis with in a 30 days of every trimester end ii) unaudited report with in a 3 months of fiscal year end iii) COs and POs financial report shall be incorporated in the 3rd trimester report. submitted to the Vice-Chairman of the PAF Board. The audit report should include, but not limiting to, the following: Financial statements Source- wise Trial Balance for the period. Source- wise Income and Expenditure Account for the period. Source- wise Balance Sheet for the period.

5 Schedules for Fixed Assets and Depreciation, Cash Balance, Inventories, Sundry Debtors, Sundry Creditors, Advances and Prepaid Expenses, Security Deposits, Fund Balance, Capital Reserve forming part of the Balance Sheet. Schedules for Expenditures- Equipment and Materials, Operating costs, Consultants Services and Training, Monitoring/Auditing etc. forming part of the Income and Expenditure Account. Auditor's comments The Audit Firm should give its comments on the financial statements audited. Based on the audit the Audit Firm shall assess PAF s financial management capability and suggest improvements required, if any. 7.0 Execution of Assignment The auditor shall carry out internal audit as specified in Para 4 on a trimester basis for the Fiscal years 2072/073. The report must be submitted within the 30 days of end of each trimester 10. Timeframe of the Services The assignment will be for a period of three years, subject to annual renewal upon satisfactory performance of the consultant. 11. Method of Selection The consulting firm selection method shall be Quality and Cost Based Selection ( QCBS) as per the procurement Plan (PAF II-AF2-S-QCBS-136). 12, Schedule of Time Frame Sampling of Partner Organizations (POs) and Communications Organizations (COs) : POs: 1. Mountain Region : District = 3, Each District = 10 POs = 30 POs 2. Hilly Region : District = 3, Each District = 10 POs = 30 POs 3 Tarai Region : District = 3, Each District = 10 POs = 30 POs COs: Total POs : 90 POs 1. Mountain Region : District = 3, Each District = 20 COs = 60 COs 2. Hilly Region : District = 3, Each District = 20 COs = 60 COs 3 Tarai Region : District = 3, Each District = 20 COs = 60 COs Total COs : Based on District number of POs may be increased /Decreased 180 COs

1. Total Economic Activity Rate 2. Male Economic Activity Rate 3. Female Economic Activity Rate 4. Ratio of Female to Male Economically Active

1. Total Economic Activity Rate 2. Male Economic Activity Rate 3. Female Economic Activity Rate 4. Ratio of Female to Male Economically Active 1. Total 2. Male 3. Female 4. Ratio of ally Active Population 5. Ratio of ally Active Youth Population 6. Different Types of Small-Scale Non-Agricultural Activities Operated by Households 7. Ratio of Adult